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Exam 17: Financial Planning and Control

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Question 21

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Long-term loan agreements always contain provisions, or covenants, which constrain the firm's future actions. Short-term credit agreements are just as restrictive in order to protect the interests of the lender.

A) True
B) False

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Question 22

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The fact that long-term debt and equity funds are raised infrequently and in large amounts lessens the need for the firm to forecast them on a continual basis.

A) True
B) False

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Question 23

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As a firm's sales grow its current asset accounts tend to increase.For instance, as sales increase the firm's purchases increase and its level of accounts payable will increase.Thus, spontaneously generated funds will arise from transaction accounts that increase as sales increase.

Business risk is related with the operations of the firm.Which of the following is not directly associated with, that is, not a part of, business risk?

The calculated cost of trade credit for a firm that buys on terms of 2/10, net 30, is lower (other things held constant) if the firm pays in 40 days than if it pays in 30 days.

Operating costs include variable costs, depreciation, and interest charges.

If a firm fails to take trade credit discounts it may cost the firm money, but generally such a policy has a negligible effect on the firm's income statement and no effect on the firm's balance sheet.

Which of the following functions does the factor (lender) purchasing accounts receivable normally perform?

The Price Company will produce 55,000 widgets next year.Variable costs will equal 40 percent of sales, while operating fixed costs will total $110,000.At what price must each widget be sold for the company to achieve an EBIT of $95,000?

A document specifying the terms and conditions of a bank loan, including the amount, interest rate, repayment schedule, and any other terms or conditions of the loan is a

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin.

By definition, a firm's financial breakeven point is the level of operating income (NOI) where its

Which of the following accounts will not rise spontaneously with an increase in sales?

The degree of operating leverage has which of the following characteristics?

Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset investment policy.The firm's annual sales are $400,000; its fixed assets are $100,000; debt and equity are each 50 percent of total assets.EBIT is $36,000, the interest rate on the firm's debt is 10 percent, and the firm's tax rate is 40 percent.With a restricted policy, current assets will be 15 percent of sales.Under a relaxed policy, current assets will be 25 percent of sales.What is the difference in the projected ROEs between the restricted and relaxed policies?

Coverall Carpets Inc.is planning to borrow $12,000 from the bank.The bank offers the choice of a 12 percent discounted interest loan or a 10.19 percent add-on, one-year installment loan, payable in 4 equal quarterly payments.What is the effective rate of interest on the 12 percent discounted loan?

Errors in the sales forecast can be offset by similar errors in costs and income forecasts.Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm.

Trident Food Corporation generated the following income statement for the most recent fiscal year, which ended December 31, 2010: $\begin{array}{lr}\text { Sales revenues } & \$ 150,000 \\\text { Variable cost of sales } & \underline{(112,500} \\\text { Grnss orofit } &37,500\\\text { Fixed operating costs } & \underline{(24,000} \\\text { Net operating income }(\mathrm{EBTT}) & 13,500 \\\text { Interest } &\underline{(10,000) }\\\text { Earnings before taxes } &3,500\\\text {Taxes (40 \%) }&\underline(1,400) \\\text {Netincome}&2,100\end{array}$ Each item of inventory Trident Foods produces has a selling price of $20. -Refer to Trident Food Corporation.What is the financial breakeven point for Trident Foods?

The purpose of financial breakeven analysis is to determine the level of sales a firm needs in order to cover the fixed and variable costs associated with producing and selling inventory items.

Viking Farms harvests crops in roughly 90-day cycles based on a 360-day year.The firm receives payment from its harvests sometime after shipment.Due in part to the firm's rapid growth, it has been borrowing to finance its harvests using 90-day bank notes on which the firm pays 12 percent discount interest.If the firm requires $60,000 in proceeds from each note, what must be the face value of each note?